An article in the Financial Daily stated that BAT has decided to revert shelf prices back to pre-SST prices. For now, we are unsure if the price roll back is permanent. However, in the event that BAT and other tobacco players choose to raise shelf prices, we expect the illicit market to grow even more rampant, given the price differential between illicit cigarettes (pack of 20s cost under RM5) and the legal market. We leave our forecasts unchanged. Maintain BUY call with unchanged TP of RM37.00 based on DCF valuation methodology (WACC: 8.2%; TG: 3.0%)

NEWSBREAK

Last Fri, an article in the Financial Daily stated that BAT has decided to revert shelf prices back to pre-SST prices. Based on our channel checks, Dunhill, Benson & Hedges and Kent has been reduced from RM17.50 back to RM17, Pall Mall reduced from RM16.00 to RM15.50 and Rothmans from RM12.50 to RM12. Additionally Philip Morris has also scaled back their initial 50 sen price increment to 20 sen (Marlboro Golds’ shelf prices were increased to RM17.50 from RM17.00 have been reduced to RM17.20). To recap, BAT, JTI and Philip Morris all raised prices at the onset of SST.

At this juncture, it is uncertain if the price roll back will be permanent as a BAT spokesperson commented “Given the market situation as we see it today and the non clarity of when the tax approach would be resolved, we have decided to revert to our original prices while waiting for guidance from the MoH”.

HLIB’S VIEW

However, in the event that BAT and other tobacco players choose to raise shelf prices, we expect the illicit market to grow even more rampant, given the price differential between illicit cigarettes (pack of 20s cost under RM5) and the legal market.

Market share: BAT’s market share of the total legal market was 57.8% in 6M18 (up from 56.5% in SPLY). Crucially, Dunhill grew YTD to 40.3% of the total legal market from 40.0%. Dunhill’s VFM brand ‘Rothmans’, which was launched late last year, made up 3.3% of the legal market in 6M18. Currently, the illicit market appears to have stabilised at 63% of TIV (figure 2).

Prospects: “Zerorisation” of GST from 1 June 2018 and 31 August should lead to better margins in 3Q as BAT was not permitted to lower shelf prices during this period. Additionally, BAT is optimistic that the newly elected government will increase efforts in curbing the illicit market. Pakatan Harapan’s (PH) alternative 2018 budget states the newly elected government intends to collect RM6.1bn in cigarette excise duty vs RM3.5bn estimated by the previous administration. We expect the new government to step up efforts to curb illicit cigarette trade, in turn boosting legal market volumes, and hence increasing excise duty tax collection in order to partially fill the tax gap from the GST-SST migration.

Forecast. We maintain our earnings forecasts as we are uncertain if the price roll back is permanent.

Maintain BUY, TP: RM37.00. We maintain our DCF based TP of RM37.00 and BUY call (WACC: 8.2%; TG 3.0%).

Source: Hong Leong Investment Bank Research - 24 Sept 2018